On a recent visit to San Jose State University, I sat in on a Money & Banking lecture by Jeffrey Rogers Hummel. (I am assuming he doesn’t mind me discussing this here...) He drew a supply-and-demand diagram for the housing market, and said that due to transactions costs, the number of exchanges in the real world is actually to the left of the “equilibrium” quantity. The vertical gap between supply price and demand price (at the actual quantity) corresponds to the difference, at that quantity, between the minimum price for house sellers and the maximum price for home buyers.
Hummel then explained that real estate brokers lower transactions costs and thereby push the market to the right, i.e. toward the intersection of the curves. He then said something like, “People typically think that real estate brokers take a ‘cut’ out of what the home sellers can get, or add on a percentage to the price buyers have to pay. But actually it’s the opposite: In a world without real estate brokers, you’d sell your house for a lower price and buy a house for a higher price, than you would in a world with brokers.”
At first this made no sense to me; if the buyers are paying a higher price, then obviously the sellers are receiving a higher price. So is Hummel (who later said he was relying on Alchien’s analysis, I think) referring to the “total price,” inclusive of transactions costs? Or is he referring to the different prices charged for the “same” house by a builder versus a homeowner? (Note that I’m not disputing the general thrust of the analysis, which I had never seen before in that diagrammatic fashion. I just was puzzled by that one remark.)
